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In early October, a U.S. Company is expecting to pay2,250,000 Euros in December to its European suppliers and wants to hedge against a rise in

  1. In early October, a U.S. Company is expecting to pay2,250,000 Eurosin December to its European suppliersand wants to hedge against a rise in the value of the Euro relative to the U.S. dollar in December.

At this time in early Octoberthe spot exchange rate Eurowas $1.175 USD. The CME Group future settle rate for December Euro FX futures contactsat this time is listed as 1 Euro = $1.1651USD, with each futures contract for 125,000 Euros per contract.

a. What position and how many contracts should the financial manager take for the hedge? Explain why. (hint # contracts = Amount of Euros Hedging / 125,000 Euros per contract),

Type of Position __Why this Position__________

Number of Contracts______

  1. Suppose in December the spot rate for the Euro rises to $1.190 USDand the futures settle ratechanges to$1.1180 USD. Calculate the spot opportunity loss or gain for the company and the futures gain or loss. What is the net hedging result?

Spot Gain or Loss ________ Futures Gain or Loss ________

Net Hedging Result ___________(Futures Gain or Loss Spot Gain or Loss)

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